Leasing versus buying. (microcomputers)
by Rosalind Resnick

Flip through just about any newspaper or magazine these days, and you're sure to find ads for cut-rate computers. With computer prices in a virtual free fall, millions of computer users are finding it difficult to justify not upgrading to an 80386 or 80486 with the latest features. And no matter what computer you buy or where you make your purchase, it's hard to overpay.

Even so, there's more to shopping for computers than simply deciding how much RAM you want and how big a hard drive to get. To entice shoppers to part with their money, computer dealers nationwide are offering not only low prices but seductive lease deals, too. Let's face it: If you're just starting a business, you may not have enough money to buy a new computer with cash, but you might easily be able to afford a monthly payment that costs little more than a business lunch with a new client.

The trouble is that some computer leases are far more costly than they first appear. Recently, one national computer chain ran a newspaper ad offering a brand-new 25-MHz 386SX IBM-compatible computer for $1,150. It also offered buyers the option of financing their purchase with a three-year, $42.55-a-month lease--and buying the computer for $1.00 when the lease term was up.

The beauty of the lease, of course, is that you don't have to tie up that $1,150 right now (assuming that you have the money in the first place). And you don't have to tie up your credit cards, either, leaving you free to spend on other things.

So is leasing the better deal? Not really.

In preparing this story, I asked my accountant, Art Berkowitz of Mission Viejo, California, to crunch the numbers and compare the two options. What he found out amazed me. Leasing the computer for three years would cost $1,532.80 (including the $1.00 you'd pay at the end of the lease to buy it)--only $0.08 less than you'd pay to finance it with a credit card at the standard 21-percent interest rate! (In fact, Berkowitz says, what the chain bills as a lease is actually more like a financing arrangement than a true lease, in which you pay only for the use of the computer and not the retail cost.)

That's why, Berkowitz says, the most economical way to buy a new computer is with cash, unless your business is so hot that you can invest the money in your company and reap double-digit returns.

"For the person who has the funds available, cash is the best way to buy almost all of the time," Berkowitz says. "Only if you're making more from your business than you'd pay out in interest, [or] if you're squeezed for cash, does it make sense to finance your computer purchase."

Even if you don't have the money, Berkowitz says, there are some other options to consider. Though many credit cards charge interest as high as 21 percent, some cards offer lower rates, occasionally as low as 10 to 15 percent, to customers who have good credit ratings. Many newspapers publish a list of low-rate credit cards in their business sections.

By charging the computer on your credit card, you can pay off your purchase as fast or as slowly as you like. If your business kicks into high gear sooner than you expected, for example, you can pay off the computer more quickly. If sales are sluggish for a while, you have the option of making only the minimum monthly payments until things get rolling. Under the terms of most leases, Berkowitz says, you're stuck making the same monthly payments until the lease term is up, forcing you to continue financing your purchase at high interest rates even when you can afford to pay it off completely.

Another option is a home equity line of credit. Because a home equity credit line is secured (that is, the equity in your house acts as collateral for the loan), banks are willing to lend you money at lower rates than you'd get with a credit card. In fact, many banks are so eager to lend you money that they'll waive all the fees and costs involved in doing the paperwork and assessing your home's value. While it doesn't make sense to mortgage your house just to buy a computer, a home equity credit line might make sense if you're starting a business and need, say, $10,000 in working capital.

"A home equity loan makes sense as long as you remember the biggest caveat of all, which is that you could lose your home," Berkowitz says. "And frankly, that scares me to death."

The bottom line: When shopping for a computer, it's just as important to check out the fine print on the financing contract as it is to read the reviews in the computer magazines. And if you're not so handy with a calculator, there are plenty of software programs (and accountants) that can crunch the numbers for you.

Remember: The old adage "Let the buyer beware" applies not just to shopping for computers but also to paying for them.